Interest rate cut in May on the cards after Fed’s preferred measure of inflation cools to 2.9%

The Federal Reserve’s preferred inflation gauge showed continued progress toward the central bank’s goal of reducing price growth to 2 percent.

Prices not going up as much as they used to is good news for your weekly shop – but it has other benefits too.

Falling inflation also boosts stock prices, which is good for Americans’ 401(K) balances.

Stock markets like lower inflation because it increases the chances that the Fed will cut interest rates – which encourages consumers to spend and also makes it cheaper for businesses to borrow money.

The core personal consumption expenditure index rose by 0.2 percent on a monthly basis and by 2.9 percent on an annual basis in December. The monthly increase was as expected, and the annual one below the 3 percent expected.

Analysts said ‘there is plenty of room for the Fed to start cutting interest rates soon.

Customers wait for orders at a grocery store in Wheeling, Illinois, Friday, Jan. 19, 2024. On Friday, the Commerce Department releases its December report on consumer spending.  (AP Photo/Nam Y. Huh)

Customers wait for orders at a grocery store in Wheeling, Illinois, Friday, Jan. 19, 2024. On Friday, the Commerce Department releases its December report on consumer spending. (AP Photo/Nam Y. Huh)

Today’s inflation figures came after more good news yesterday, when it was revealed that the US economy grew much faster than expected in the final three months of last year, deflating expectations as consumers and businesses continued to spend .

For the average American, their biggest exposure to the stock market is likely in their retirement plan, since most 401(K) accounts have some money invested in these benchmark indexes.

Stocks rally — like this year — is good news because it means their portfolios are likely to recoup significant losses starting in 2022, when the S&P 500 ended the year down 20 percent.

America narrowly missed going into recession – which many analysts predicted was inevitable.

“The bigger picture is that evidence of a sustainable return in inflation to the Fed’s target is increasing,” Pantheon Macroeconomics analysts said in a note, expecting inflation data to rise 150 basis points this year. will cause rate cuts.

“Core PCE inflation has been running at an annualized rate in line with the Fed’s 2% target for seven months now,” Andrew Hunter, deputy chief economist at Capital Economics, said in a note to clients.

‘This reiterates the message that there is not really a ‘last mile’ of disinflation to reach and that, even with real economic growth still resilient, there is plenty of room for the Fed to start cutting interest rates soon.’

Traders now see a 90 percent probability that the Fed will deliver its first rate cut in May, according to CME Group’s FedWatch Tool, up from earlier expectations in March.

The S&P 500 closed at a high for a fifth straight session on Thursday after data reflecting strong US economic growth in the fourth quarter shook off dire predictions of a recession in the wake of the Fed’s rapid rate hikes.

All three major indexes are set for their third straight week of gains, marking their 12th weekly gain out of 13.

Friday’s light inflation data arrived a day after government figures showed that the economy expanded at a surprisingly strong 3.3% annual pace in the last three months of last year.

Robust consumer spending drove the growth, capping a year that began with widespread expectations of a recession. Instead, the economy grew by 2.5% in 2023, from 1.9% in 2022.

The US central bank is expected to keep its policy rate unchanged at the current 5.25 percent to -5.50 percent range at its meeting next week. Since March 2022, the Fed has raised its benchmark overnight rate by 525 basis points.

Alleviating inflation increases household purchasing power, helping to drive consumer spending and the overall economy.